Correlation Between Microsoft and First Merchants

Can any of the company-specific risk be diversified away by investing in both Microsoft and First Merchants at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Microsoft and First Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Microsoft and First Merchants, you can compare the effects of market volatilities on Microsoft and First Merchants and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Microsoft with a short position of First Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and First Merchants.

Diversification Opportunities for Microsoft and First Merchants

-0.23

Correlation Coefficient

Microsoft  First Merchants

Very good diversification

The 3 months correlation between Microsoft and First is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and First Merchants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Merchants and Microsoft is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Microsoft are associated (or correlated) with First Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Merchants has no effect on the direction of Microsoft i.e., Microsoft and First Merchants go up and down completely randomly.

Pair Corralation between Microsoft and First Merchants

Given the investment horizon of 90 days Microsoft is expected to under-perform the First Merchants. In addition to that, Microsoft is 1.78 times more volatile than First Merchants. It trades about -0.11 of its total potential returns per unit of risk. First Merchants is currently generating about -0.01 per unit of volatility. If you would invest  2,517  in First Merchants on December 28, 2024 and sell it today you would lose (17.00) from holding First Merchants or give up 0.68% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Microsoft  vs.  First Merchants

Microsoft

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

First Merchants

Risk-Adjusted Performance

Weak

Over the last 90 days First Merchants has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical and fundamental indicators, First Merchants is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Microsoft and First Merchants

The main advantage of trading using opposite Microsoft and First Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, First Merchants can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in First Merchants will offset losses from the drop in First Merchants' long position.

The idea behind Microsoft and First Merchants pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.